Royal Dutch Shell to take over BG Group in megadeal

Posted
on 22 April 2015

Peter Ker, The Sydney Morning Herald

Oil and gas major Royal Dutch Shell looks set to take control of a $US20 billion ($26 billion) LNG processing plant in Queensland after agreeing to a $91 billion (£47 billion) takeover of BG Group. The deal is a huge vote of confidence in Queensland's $63 billion LNG export industry and comes as the Abbott government bets big on fossil fuels in its long-awaited energy white paper. The two companies confirmed on Wednesday they would push ahead with one of the biggest energy deals in history, and redraw the Australian industry landscape in the process. BG shareholders will be offered 383 pence and 0.4454 "Shell B" shares for every BG share they hold.

The white paper predicts Australia's energy exports of $71.5 billion will jump to $114 billion within five years, thanks largely to the LNG boom, and marks a return to resource optimism in Australia. It urges the states to remove barriers to onshore gas production, privatise their remaining state-owned electricity assets and support independent regulation and a more competitive and transparent national energy market. "Unnecessary state regulatory barriers are limiting much-needed new gas supply," the white paper says in a clear reference to bans and regulatory go-slows in the onshore gas-rich states of Victoria and NSW. But it left generators sitting on billions of dollars of stranded coal plants cold by all but ignoring climate change, even as the government and the federal Labor opposition moved closer to a resolution of their impasse over renewable energy targets.

Energy Minister Ian Macfarlane said generators would know where they stood in the next four months, when the government finalised its climate change position for the Paris talks in December. He said the white paper aimed to solve problems of chronic oversupply in the energy market by sending clearer signals to consumers to reduce their peak demand through smart meters and flexible "time of use" charging.

The Shell-BG deal is expected to deliver $US2.5 billion worth of synergies and a significant proportion of those will be in Australia, where BG has the Queensland Curtis LNG facility, and Shell has a large portfolio of coal seam gas through its Arrow Energy joint venture with PetroChina. QCLNG began exporting in December. However, it has been buying third-party gas in a bid to solve a shortage of feedstock for its $US20 billion LNG liquefaction plant.

Arrow, on the other hand, has large amounts of uncontracted gas and has recently abandoned plans to build its own LNG processing facility. The takeover could bring Arrow gas into QCLNG and potentially stoke a third train at the facility. "There is a big pile of gas there that, at some stage, Shell and PetroChina want to monetise. So this is potentially a good way of monetising some gas, whether it be expansion gas or extension gas," RBS analyst Andrew Williams said. "It would seem to offer a clear path to a commercial outcome."

The marriage of Shell and BG could also make life harder for ASX-listed Santos, which is short of gas at its Gladstone LNG (GLNG) facility. It had eyed Arrow gas as a solution for its own woes. "Arrow Energy is the largest source of uncontracted gas in Queensland and if that were taken off the table as a supply option for GLNG, then GLNG would likely have to move to look at other options which would be much smaller scale and possibly higher risk," UBS energy analyst Nik Burns said. "You could infer that this could lead to a path where it is less likely that Arrow gas is made available to GLNG."

As reported in Fairfax Media, the Abbott government also will ask the Australian Competition and Consumer Commission to investigate the transparency and competitiveness of the eastern gas market. The white paper says there is significant unfinished business in the two-decades old drive to deregulate Australia's national energy markets under independent regulatory oversight. "The ownership of energy assets by some state and territory governments is in conflict with this market reform agenda, particularly where asset owners have a regulatory role and are less efficient," the white paper says. The white paper comes as NSW is resisting Australian Energy Regulator efforts to cut electricity prices to protect state-owned, highly inefficient electricity poles and wires companies that it is belatedly selling, and Queensland lags in time of use charging and poles and wires privatisation. "One of the things holding us back in Queensland has been time of use charging," Mr Macfarlane said.

The Shell-BG deal will be completed via a court-sanctioned scheme of arrangement, and will be subject to votes by Shell and BG shareholders. Directors of both companies have recommended the deal to shareholders. The deal is not expected to be complete until early 2016. Shell chief executive Ben Van Beurden said the acquisition of BG would be a "great fit" for Shell. "BG will accelerate Shell's financial growth strategy, particularly in deep water and liquefied natural gas: two of Shell's growth priorities and areas where the company is already one of the industry leaders," he said. "The combination will enhance our free cash flow potential and our capacity to undertake share buybacks, where I expect to see a substantial increase in pace."

Shell has vowed to launch a three-year campaign of share buybacks starting in 2017 if the deal goes ahead, and also has vowed to pay a $US1.88 dividend a share this year and in 2016. If successful, the deal would reverse the recent trend that has seen Shell shrink its footprint in Australia. The oil giant sold most of its Australian downstream business, including the Geelong refinery, to Viva Energy in 2014 for $2.9 billion. It reduced its stake in Woodside Petroleum and its stake in the Wheatstone LNG joint venture in the same year. The sheer size of the transaction is rivalled only by the $US80 billion merger of Exxon and Mobil in 1998.

There have been several oil and gas sector deals since oil prices halved in the second half of 2014. Woodside bought assets owned by Apache, while Kerry Stokes' Seven Group bought a stake in Beach Energy. BG had previously been named as potential prey for cashed-up predators like Exxon Mobil, and BP also predicted to come under the attention of opportunistic bidders.